OVERVIEW

This note summarises the FCA's interim update on its review of Motor Finance, which was published on 15 March 2018.  The themes covered by the FCA – affordability, commission and clarity ‑ will be of interest to asset finance firms generally, as well as those who deal with Motor Finance.

The FCA notified its decision to scrutinise Motor Finance in its Business Plan 2017-18. In July 2017, the FCA commenced its Review on solo-regulated firms in the sector. The Review considers customer engagement relating to Motor Finance agreements and its impact on consumers. It also focuses on firms' analysis of risk and their ability to continue operating in stressed market conditions. The sample used by the FCA consists of the largest lenders it supervises; these amount to 52% of the sector.

WHAT DOES THIS MEAN FOR FIRMS?

As part of the Review, the FCA is assessing firms' risk models, analysing customers' credit reference agency files, reviewing agreements between lenders and brokers and reviewing sales practices.

The FCA has, so far, concluded that firms have been robust in their process of pricing the level of risk in Motor Finance agreements. Firms have had appropriate strategic plans to manage credit risk and are unlikely to be severely impacted in stressed market conditions, absent structural changes in the market which could affect assumptions on residual car values.

The Review will continue to examine the following areas:-

  • Firms' assessment of customer affordability – the FCA has found that the number of arrears and default rates have increased and will, as a result, analyse the process by which lenders assess affordability with particular focus on consumers with lower credit scores. The FCA will assess this data in comparison with the requirements under its Consumer Credit Sourcebook (CONC).
  • Commission arrangements – the FCA considered various models of commission in the industry and found that some of these structures result in an increase in commission as the interest rates in agreements increase. The FCA will test the effectiveness of firms' systems and controls relating to the commission structures of brokers. It will assess whether firms have incentivised higher interest rates to the detriment of consumers.
  • Clarity and transparency – the FCA has found that some websites and documents do not meet its standards for clarity and transparency, limiting the ability of consumers to make informed decisions. It will continue to examine these further as part of this Review. It will also conduct mystery shopper exercises to test compliance at the point of sale. 

NEXT STEPS

The full FCA Motor Finance Review is expected to be published in September 2018. The FCA's March update can be accessed here. Lenders should consider an assessment of their systems and controls, literature and agreements with brokers to assess their compliance with CONC.